Investors v Homebuyers, Minns v Councils – It’s a war out there

In the ongoing battle between investors and first-home buyers, it’s the investors who are presently the more active of the two. So active that lending to investors is at a six-year high share of total home lending – 36 per cent, far outpacing the first-home buyers’ share of just 18 per cent.

It should be noted that most home finance still goes to owner-occupiers who aren’t buying their first home, but it’s the investors whose share has gained the most in recent months. CoreLogic’s Eliza Owen says investors are looking forward to interest rate cuts that will drive up prices: “The recovery in investor finance began in March of 2023, which is pretty soon after the market bottomed out in value terms, so there’s a sense of taking advantage of the bottom of the cycle,” she said.

This optimistic approach to finance by investors is driving Sydney auction volumes 36 per cent higher than a year ago according to PropTrack. The firm says the higher clearance rates seen over the first two months of 2024 were encouraging more sellers to take their homes to auction.

In NSW investor lending makes up more than 40 per cent of all housing finance. AMP chief economist Shane Oliver said the share of lending to investors has been rising from a low base and had earlier peaked at 46 per cent of housing finance in 2015. He said that although many investors have been constrained by higher interest rates and are now cash-flow negative, owner-occupiers have been hit harder because investors can offset higher interest costs using the benefits of negative gearing.
    
Not all investors achieve the capital gains they’d hoped for. In some parts of Sydney, one in four investors have sold at a loss. CoreLogic analysis shows that across Sydney 11.6 per cent of all investor sales made a loss in the September quarter last year, and the median amount lost was $37,020. 

According to CoreLogic: “In the Cumberland local government area, 26.4 per cent of investment properties that sold in the September quarter traded at a loss, followed by Parramatta (25.8 per cent), Burwood (23.6 per cent), Ryde (22.6 per cent) and Canterbury-Bankstown (20.7 per cent).

“The deepest losses were in Strathfield at a median $72,500 among those who sold in the red, followed by Canada Bay, Parramatta and Ryde on at least $45,000 each.”

By way of comparison, look at Camden where every investor who sold in the September quarter made a profit. The size of the median profit was $592,500. Median profits of more than $550,000 were also seen in the Hills Shire and Woollahra.

Ray White Parramatta Group selling principal Steven Fan said that many investors who purchased new apartments five or six years ago were now selling for a loss. “They bought off the plan when the market was hot, when they’re choosing to sell now, a lot are losing money,” he said.

Mr Fan also noted that a larger proportion of investors were prepared to sell for a loss than owner occupiers. Many have been upgrading to house-and-land packages, expecting they would deliver stronger capital gains: “Yes, they lost some money but they can carry this loss for their lifetime to offset [any future] capital growth and a lot will invest into other property.”


Rental pain persists

Suburbtrends’ February Rental Pain Index shows that an increasing number of suburbs recording what the Index classifieds as the “highest possible distress score”. The monthly report takes into account factors that include rent increases, rental availability, vacancy rates and affordability.  These are combined into a single score, with 100 indicating “maximal rental stress” and 75 and above considered “extremely hard market conditions”.

PropTrack’s director of economic research, Cameron Kusher, says the rental market in 2023 had experienced low supply and strong demand, with the national rental vacancy rate at a near record low of just 1.1 per cent: “These conditions made it difficult for renters to find accommodation and saw landlords increase rents, a trend likely to continue in 2024,” he told realestate.com.au.  

“While we expect rents to continue to rise this year, it’s likely that the rate of growth will slow. The already higher cost of renting and overall increase in the cost of living will limit rent price increases moving forward.

“Limited supply and high demand saw rental prices skyrocket in 2023, with the median advertised rent on Realestate.com.au rising 11.5 per cent over the year to sit at $580 per week. However, 2023 saw a slower rate of rental price growth than the 15.6 per cent increase in 2022.”

Sydney’s vacancy rates are low and will stay that way for the foreseeable future. Sydney's rental vacancy rates fell to just 1.3 per cent for the first month of 2024, the sharpest fall across the country, down from 1.7 per cent in December, according to SQM Research.

As of January 2024, there are just 9,114 available properties for rent across the city. This is much less than the 12,143 available properties recorded in June last year, which was also roughly in line with the number recorded in June the previous year. 

This drop in numbers is largely the result of the housing market boom during the pandemic when many investors took the opportunity to sell off properties, in part due to uncertainty about rental demand but also because rising home prices provided the opportunity to sell out with solid capital gains.

Another cause of pain for renters is that over the five years since FY 2018-19 rents for the most affordable properties in Sydney have increased much faster than those for the most expensive properties, further putting affordable rentals out of reach for even lower income households.

There’s also been a slowing of new apartment construction due to rising costs and shortages of materials. International property firm, CBRE says that a severe undersupply of new apartments will be in place in Sydney for at least the next five years.

CBRE estimates that Sydney apartment delivery will average only 14,000 per annum over 2024 -28, while the demand for housing stock is likely to average 33,000 per annum over this period. This ongoing shortage of rental properties will ensure that rents will continue to rise and increase the rental pain felt across the Sydney market.


Minns v councils battle continues

The NSW premier, Chris Minns has commenced a battle with councils that looks anything like peace could be achieved anytime soon. By July 1, the government will give each NSW council a new set of targets telling them how many dwellings they are expected to deliver, and over what timeframe. The government says its changes to low- and mid-rise housing could yield 110,000 additional dwellings across the state by 2030.

The councils’ reactions have been mixed with some simply accepting the hand they’ve been dealt while others have reacted with hostility and headed for the courts in response to their targets and the methodologies to be employed to achieve them. Councils that are used to having authority over all development in their territory don’t like to surrender their powers when they’re told that new planning controls dictated by the state government will mean among other things that all low-density residential land in NSW will now have to permit subdivisions and dual occupancies regardless of councils’ prior regulations.

Councils have expressed concerns in a number of areas. These include the impacts on heritage, population growth, reduction in open space, increased density and ‘squeezing’ infrastructure. In reply, the Premier has given the councils the opportunity to come up with their own plans to yield a similar number of homes.

“If we can come to an accommodation with the mayors, the local councillors in Sydney, where we can get the number of houses that we need in the timeframe that is required, we will leave it up to them how they design their cities,” Minns said.

“There is – perhaps for the first time in a very, very long time – an opportunity for the civic leaders, the political leaders of NSW, to come together and finally make some progress when it comes to housing in Australia’s largest city.”

An example of this progress came when Meriton was given the green light to build hundreds of apartments on an inner-city development site, the former Suttons car dealership site in Zetland. A majority of City of Sydney councillors voted to approve the proposal which will create more than 800 homes plus a new supermarket, childcare centre and public park on the site.

Some councillors opposed the proposal because it lacked a commitment to incorporate a component of affordable housing. Sydney Lord Mayor Clover Moore commented it was disappointing to see councillors oppose a development that will help the City of Sydney meet the NSW government’s housing targets: “We, as a responsible council, can’t reject good, well-located housing because a developer is not exceeding its statutory obligations,” she said.

One side effect of the Minns-inspired planning changes is a boom in land sales in Sydney’s new housing corridors. Data from Research4 shows sales jumping 26 per cent in recent months with about 500 Sydney lot sales for the December quarter, a rise of 26 per cent on the previous three months and 24 per cent higher on the prior year.


First-home buyers’ struggle

Domain’s Kate Burke says that even a modest home is getting out of reach for first-home buyers:
“An average first-home buyer couple can no longer comfortably afford the loan repayments on an entry-level house in the nation’s biggest cities, and even units are slipping out of reach in some regions,” she writes.

Domain’s First Home Buyer Report, produced in collaboration with Commonwealth Bank-backed Unloan, says that young couples would need to put more than 40 per cent of their income towards mortgage repayments if they purchased an entry-level house in most capital cities, and the percentage skyrockets to almost 60 per cent in Sydney.

The report describes how a Sydney couple earning the average income for 25 to 34 years old would see 57.2 per cent of their income go to mortgage repayments if they purchased an entry-level house costing $927,250. The report also notes that buyers are not usually approved for such a loan. Even unit repayments in Sydney, 37 per cent of average income, are well about the 30 per cent figure for mortgage stress.

AMP chief economist Shane Oliver told Kate Burke that first-time home buyers face a challenging environment and the expected rate cuts from mid-year would do little to improve the outlook: “We will start to see some relief as rates come down, but that won’t help with the initial challenge of saving a deposit because it can mean lower rates on bank deposits … and it could push up property prices again [as borrowing capacity rises], so it’s a double-edged sword,” he said.

One possible way to help ease first-home buyers into a home of their own is government shared-equity initiatives including the federal government’s Home Guarantee Scheme (HGS) as they enable people to buy with as little as 5 per cent savings and without having to pay lender’s mortgage insurance. However, HGS and similar schemes have a cap on incomes and purchase prices.

Another scheme that might yet make it through the Senate is the Help to Buy Scheme, a federal government scheme that would allow first-home buyers to enter the market with a two per cent cash deposit and become a co-owner of their property with the government. 

However, the Greens oppose the scheme noting that it would only help around 40,000 Australians over four years and could well simply drive up prices for all buyers.

Westpac Business Bank chief economist Besa Deda said young people trying to get onto the property ladder were likely to live with their parents for longer: “Household finances are under pressure and consumers have been very downbeat,” Deda said. “The pace of rent growth is easing but it’s still very strong.”

And even when they did eventually buy a property, the current and future generations of home owners would take much longer to pay off their loan than earlier cohorts, she said.

“To really resolve the housing affordability issue, we need a multipronged approach, reviewing a whole range of tax policies; negative gearing, capital gains, stamp duty, but also planning laws.”


Tastes change with prices


An interesting shift in popularity is doing a minor rewrite of housing tastes in Sydney. For years it’s been the case that houses in the upper quartile of properties perform the best, regardless of property market conditions. 

Blue chip suburbs near beaches and in the inner city recorded some of the strongest growth in Sydney in the past five years. Bronte jumped 78.2 per cent to a median of $5.8 million, Glebe grew 72.8 per cent to a median of $2.73 million and North Bondi increased 67 per cent to $4,275,000.

Lately, however, this hasn’t been the case - affordability limits have kicked in and prices in the top quarter of the housing market, properties priced above $2.15 million, have fallen by about 0.4 per cent in the last three months. 

So where’s the money going? More affordable house values are still rising, although at a slower pace than last year. The lower quarter, that is, houses valued below about $1.01 million, are up 1.3 per cent over last year. Values rose 0.6 per cent for the middle of the market.

House prices in suburbs on the outskirts of the city have recorded impressive jumps due to their relative affordability, as many are priced well below the citywide median of $1,595,310.

“Denham Court, Gledswood Hills. They’re all within a kilometre radius of Leppington. We’ve got the railway station, you’ve got the airport coming. You can see that being built, and it’s a realisation,” said Michael Cavagnino of LJ Hooker Leppington.

“It’s all about accessibility and affordability. We’ve had a lot of people moving out from the inner suburbs because the station is there as well as the flexible working arrangements.

CoreLogic research director Tim Lawless said the upper end of the market was adjusting after strong rates of growth. He said it was likely demand had eased as some buyers were priced out of the market segment, noting that values were up 11.9 year-on-year.

“People often think [the upper quarter] is immune to affordability pressures, but … given borrowing capacity has dropped quite a bit and house prices have risen quite substantially it makes sense that there would be some [buyer] deflection to the middle and lower marketplace,” Lawless said.

CoreLogic figures also show that the price gap between apartments and free-standing houses has widened by 45 per cent over the past four years due to three main reasons: rising underlying land values, the scarcity of freestanding homes available for purchase, and the desire for more space.

In that time house prices in capital cities rose by 33.9 per cent, or $239,000, while unit values in the capitals rose by 11.2 per cent — equivalent to $65,235. Mr Lawless attributes this gap to the scarcity of land saying: "That's probably been the key factor that's driven up detached housing prices so much higher than units. If you want an affordable detached house, you need to look further and further afield from the city."

As house prices become more unaffordable, it’s his opinion that apartment prices will most likely increase: "I think that's probably a fair enough outlook, that we will see more demand being deflected towards the medium and high density sectors, and that's where people's budgets will probably carry them, not really due to any preference shifts," he said.

"It's also probably fair to say, given how much this gap has opened up between houses and units, that units are becoming undervalued, at least in relativity to houses.

Commonwealth Bank’s head of Australian economics Gareth Aird said it was to be expected that growth across the market would moderate due to already high prices, constrained borrowing power and an increase in the number of homes for sale.

“All conventional metrics of affordability have deteriorated, so you get to the point where it’s hard for home prices to keep pushing higher at the rates that they have been, but that’s not to say prices will go backwards,” Aird said.

Domain’s Jemimah Clegg found some calculations that show just how far Australian home prices have soared above fair value. Houses in almost all Australian capital cities are overvalued by more than 29 per cent says data from the Real Estate Institute of Australia, with Sydney overvalued by 33 per cent.

AMP’s Shane Oliver says that with valuations so stretched, then if something like a severe recession happens prices could fall sharply, adding that this was unlikely to happen.


Who can afford a home?

It’s more than a little bit concerning that economists tell us only wealthy Australians can afford to buy a home. How can this be possible when the average household income of home buyers has increased to $220,000, a nearly 40 per cent jump from just four years ago? 

It’s not like full-time workers aren’t paid reasonably well - the average full-time annual income in Australia is $98,098 as of November 2023, based on Australian Bureau of Statistics’ weekly earnings figures. But Australian borrowers are taking out fewer home loans now that in late 2023 and the ABS recorded a 3.9 per cent fall in January.

Jarden analysis of Commonwealth Bank data shows that almost a third of all home loan applicants now make more than $200,000. This gives them priority over their competitors in the loans market earning less than $150,000.

Jarden’s chief economist Carlos Cacho told Domain’s Jim Malo the analysis raised serious questions about who can afford to buy a home in Australia, despite recent price falls.

“What we’ve seen over the last four years or so is that the share of buyers who make median or below income has decreased from 30 per cent to 18 per cent,” he said. “It’s really been hollowed out. Part of the increase has been due to income growth being relatively strong but even when you adjust for that the shift is well and truly beyond that.

“Where to from here? It’s hard to see this getting better any time soon,” he said. “Affordability will be improved a bit if and when we see a rate cut by the RBA, but history shows it will probably make house prices go even higher. It’s really hard to move the needle with affordability. It’s just broken.”

Lenders are dealing with a more select crop of buyers – those with higher incomes than previously were seeking loans. Axton Finance director and mortgage broker Clinton Waters told Domain’s Jim Malo that high prices have squeezed out lower income buyers who have found current levels of repayments unaffordable. 

“What we see at the coalface is that there is certainly a trend towards those with stronger incomes being approved for mortgage lending,” he said. “We see it as becoming very much a two speed market of those who can afford servicing and those who can’t.”

And, as for lower income buyers: “They don’t call us,” he said. “But my assessment of it is there’s a bit of resignation to the fact that this is unaffordable.”


Sources:

‘Rental affordability has gone from record highs to record lows in the space of just three years,’ Michael Janda and Gareth Hutchens, ABC News online, 9 March 2024
‘Sydney’s Rental Market Trends and Forecasts,’ Leanne Jopson, February 22, 2024
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